Special Report Reveals Biotech Stock Drivers: Michael Hay

Source: George S. Mack of The Life Sciences Report (7/26/12)

Certain predictable dates and events bring profound effects to bear on biotech stocks. Michael Hay, vice president of Sagient Research Systems, successfully applies the art and science of important catalysts to predict when biotech stocks will move up or down. In this exclusive interview with The Life Sciences Report, Hay discusses his strategy and names companies that will produce meaningful gains for investors.

The Life Sciences Report: From a share price perspective, what's the most important date in the life cycle of a drug in development?

Michael Hay: I think the release date of pivotal phase 3 data is the most important. It can be different depending on the company or the situation, but typically you know on that date whether a drug is going to work or not, and you have a good handle on whether the drug is going to make it to the market. Proof-of-concept data from phase 2 gives you some indication, but the U.S. Food and Drug Administration (FDA) is going to base its approval on phase 3 data.

If you look at success rates across all indications in phase 3 trials, you have about a 50/50 chance of success. You could expect a large share price increase based on positive data at that point. Similarly, you could expect a large price decrease if the data are negative, because that drug is essentially dead. Or, it is back to the drawing board for the company.

TLSR: What about advisory committee meetings? Stocks seem to get a huge boost from those if they are favorable.

MH: Advisory committee meetings have become almost more important than the actual Prescription Drug User Fee Act (PDUFA) date, when drugs are approved or not approved. A wide variety of specialties are represented on the panel, and the experts come from such different backgrounds that it is hard to predict what they are going to say. The opinion of that final panel, whether up or down, tends to surprise people.

Another interesting phenomenon occurs a couple of days before the PDUFA date, when a company gets a briefing document from the FDA. The job of that briefing document is to bring to light any outstanding questions or concerns that the FDA might have around the data. It almost always seems like there is a negative aspect to the document, or to the application, which panel members are then supposed to go over. That's their job, to hash out all of the negative aspects and ask if they are important enough to keep a drug off the market.

TLSR: In fact, the PDUFA date can be a letdown even if it's positive, can't it?

MH: It seems so. We've actually seen stocks go down on drug approvals. It's a sell-on-the-news phenomenon. The share price is already baked into the approval, and investors look ahead to the drug launch at that point. A lot of companies have had trouble launching drugs and living up to analysts' expectations on sales.

TLSR: Assuming no additional immediate products are coming through the pipeline toward the market, are catalysts generally incremental after approval of the drug? In other words, are investors then waiting on growth of revenues?

MH: The primary catalysts after approval are quarterly earnings dates and what we see from revenues. You can follow prescriptions and see how they are tracking, but that's not publicly available information. You can subscribe to prescription data and follow that, but it is quite expensive. Other conditions or events, such as reimbursement status or additional trials to firm up labeling claims—or just different corporate activities—may act as catalysts. But primarily, investors want to see sales of the drug once it is approved.

TLSR: What is the disease indication du jour? I know oncology is always powerful as a motivator for investors, but where do you see new emphasis?

MH: Oncology is going to always be important, and at the top. Infectious disease was the area du jour during the last 12–18 months. There was a big rush in hepatitis C (HCV) drug development, and there's still a lot going on there. But I think that is changing. A lot of people have seen data, and a lot of companies have already been bought, or have realized the value creation they were going to see.

We are seeing a shift into metabolic or endocrine diseases. Two new obesity drugs have been approved since we last spoke. Belviq (lorcaserin hydrochloride) from Arena Pharmaceuticals, Inc. (ARNA:NASDAQ) and Qsymia (phentermine + topiramate) from Vivus Inc. (VVUS:NASDAQ) have received FDA approval. These could be very large drugs in a new area of development. Quite a bit of data was presented at the recent American Diabetes Association (ADA) meeting indicating that we are going to see an explosion of patients over the next 10–15 years. The metabolic and endocrine areas are going to see development of drugs du jour over the next 12–18 months.

TLSR: Advisory panels and prescribing physicians appear to be willing to bet on the benefits and diminish some of the risk in obesity drugs now because obesity is such an issue. That is my impression. Is this a new movement?

MH: Yes. I see it as almost a 180-degree turn from where we were two to three years ago. A lot of people have come to realize that obesity is a treatable ailment, and that you can save the system quite a bit of money if you reduce obesity rates and improve patients' metabolic profiles. It has been amazing to watch the two new obesity drugs gain approval, considering that when they went before advisory panels they were hampered by safety issues and negativity. There are definitely still some risks. If the drugs produce cardiovascular problems, then we're back to square one in treating obesity, at least from a pharmacological profile. We can surgically treat obesity pretty well.

TLSR: Back after the 1960s, 1970s and 1980s, when we saw widespread abuse of amphetamines, it seemed like stimulants would never again be used for weight reduction. But the Vivus product Qsymia has since been approved, and it has a barbiturate-like component in it. What are the implications of that, if any?

MH: The component in Qsymia, topiramate, is also approved to treat seizures. The phentermine dosage is a lot lower than what is approved on the market from a stimulant standpoint. Interestingly, the drug was approved in four different dosages, which allows doctors and patients to find the dose best suited to the patient, looking at efficacy versus side effects. It was very clever of Vivus to package the drug that way, and I think it could be a market advantage over Arena's Belviq. You can titrate the Qsymia dosage up or bring it back down, versus the one-dose approach with Arena's drug.

TLSR: Are you still bullish on Vivus?

MH: I am. It still has quite a bit it can accomplish. I like Vivus because it owns 100% of its drug. It also owns the erectile dysfunction (ED) drug Stendra (avanafil), which was approved by the FDA in April. Vivus has all the rights to Stendra, and will probably look to license out. Being that Vivus has gone through the whole regulatory process owning 100% of the drug, it has maximized its value.

TLSR: Assuming for a moment that Qsymia sales don't wow the Street, but just progress along as forecast, how important is Stendra?

MH: I think the ED drug is important for a couple of reasons, but I don't know that it will be able to trump disappointing sales in the obesity drug. Qsymia has 10 post-approval study requirements, including the large cardiovascular one, so it is looking at completing a few hundred million dollars in requirements, as well as building its own specialized sales force and selling the drug. I see licensing out the ED drug as a way to monetize another asset without having to dilute shareholders. Vivus may not have to raise money on the public market to the same degree it would have to if it didn't have that drug.

TLSR: Is Vivus going to be able to sell Qsymia by itself, or must it partner?

MH: That's a good question. Analysts' expectations may be lower because the company is selling the drug without a larger partner. I think it will probably undersell the drug, as compared to potential sales with a larger partner.

TLSR: Arena's Belviq was approved on June 27, just a short time ago. Are you still bullish on Arena?

MH: I am, but less bullish. You made a good point last time we spoke about how there was quite a bit of upside to Arena given that it had underperformed Vivus, and that turned out to be right. But I think Arena's position is more difficult because it is partnered with Eisai Co. Ltd. (ESALY:OTCPK) and doesn't realize 100% of the profits. It gets about one-third of the revenue coming from the U.S. It should be interesting to see how well Belviq sells versus Vivus' Qsymia.

TLSR: The last time we spoke you had some trepidation about the Orexigen Therapeutics Inc. (OREX:NASDAQ) obesity product Contrave (naltrexone + bupropion) being approved. How do you feel about that now?

MH: The company is still waiting to rule out risk with a cardiovascular outcome study. After the two approvals for Arena and Vivus, I feel much more positive. The overwhelmingly positive votes for these two approvals can be seen as a green light for Orexigen. Contrave may actually have a better profile than Arena's Belviq or Vivus' Qsymia once it does hit the market. Arena's drug seems very safe, with what I would call minimal efficacy. Vivus' Qsymia probably has a lot of side effects, but the best efficacy. Orexigen is in the middle. It's a Three Bears syndrome.

TLSR: Orexigen's next catalyst is the cardiovascular outcome study. Is that correct?

MH: That is the primary catalyst coming up, due in the second half of 2013.

TLSR: Could you mention another company?

MH: I would like to mention some companies from our Q3/12 BioMedTracker Outlook Report. Amarin Corp. (AMRN:NASDAQ) is developing AMR101 (ethyl ester of eicosapentaenoic acid) for high triglycerides. Its PDUFA date is July 26, and we are positive on this. This drug is a very highly purified fish oil. It lowers triglyceride levels while not increasing low-density lipoprotein (LDL). There is a competing product on the market, Lovaza (omega-3-acid ethyl esters), sold by GlaxoSmithKline (GSK:NYSE), and it did about $913 million (M) in revenue last year. There is a significant market for triglyceride reduction. AMR101 did not raise LDL as Lovaza does.

One of the interesting things about the AMR101 PDUFA is that there is some doubt as to whether this drug could be labeled a new chemical entity (NCE) by the FDA. An NCE would carry five years exclusivity on the market because a composition-of-matter patent does not exist. We see some of its patents as being weak, and its exclusivity on the market is quite important. If it is not granted NCE status, there will be three years of exclusivity instead of five. An extra two years could mean close to $1 billion (B), which is quite significant.

We do think AMR101 is going to be approved, and we do think there is about a $1B market for the drug. But different post-approval patent challenges, as well as sales, will prove interesting.

TLSR: You can't patent a natural product. AMR101 has obviously been altered through the purification process, but the molecular structure of the fish oil probably has not.

MH: That is correct. A similar product has been approved for a number of years in Japan. We don't believe there is enough uniqueness in this product to warrant an NCE designation, but it will be interesting to see what happens. The market hasn't priced it one way or the other, and that adds volatility to the decision.

TLSR: Would you like to mention another company?

MH:NPS Pharmaceuticals Inc. (NPSP:NASDAQ) has developed a drug called Gattex (teduglutide) for short bowel syndrome (SBS). These patients have problems absorbing nutrients because only a very small amount of small intestine is present. The PDUFA date is at the end of Q3/12, on Sept. 30—which is actually a Sunday, so we expect the decision to fall on Friday, Sept. 28. NPS hasn't had an advisory committee meeting yet, but the FDA has stated it wants one. If the advisory committee date falls close to the PDUFA date, the PDUFA could be extended.

TLSR: I note that NPS' partner for Gattex is Takeda Pharmaceuticals U.S.A. Inc. (4502:JP), the largest pharmaceutical company in Asia. Is short bowel syndrome something that occurs more in Japan, or perhaps other Asian nations?

MH: It is typically related to another disease that causes removal of intestine. The most common reason for removing part of the small intestine is Crohn's disease. There is incidence in infants who don't fully develop the lower intestine, but the company is not currently targeting this indication. But this drug could be used quite effectively in that application. Takeda is partnered in the European Union as well as Japan.

TLSR: You have been following development of Quad Integrase (elvitegravir + cobicistat + emtricitabine + tenofovir). Can you comment?

MH: Yes. The Quad pill from Gilead Sciences Inc. (GILD:NASDAQ) is four different components combined in a once-daily formulation for treatment of human immunodeficiency virus (HIV). It is more convenient for patients to get their four different HIV medication in a single pill, and a way for Gilead to extend its HIV franchise past some of the patent lives of the individual components. Quad is expected to be a multibillion-dollar drug. Part of that comes from the other components that Gilead sells.

Quad represents an important step in HIV treatment and we expect this drug to be approved. It has a PDUFA date of Aug. 27. It has shown non-inferiority efficacy data versus the components and the standard of care that is on the market now.

MH: It has phase 2 efficacy data coming for its hepatitis C (HCV) drug candidate ACH-1625. These are for sustained virologic response (SVR) results—cure results—and include peginterferon and ribavirin data. The data are expected this quarter. I think we are moving quite rapidly into any treatment combination that does not include interferon. The data will definitely be important, but ACH-1625 is not the most exciting drug in the space.

TLSR: Are you neutral on this company?

MH: I'm neutral on it. A lot of the value has been realized in companies in the HCV space, especially for earlier-stage data. Investors want to see which company will be the leader in a non-interferon combination in the future, and it is going to be tough to beat out drugs that already have a substantial lead, such as Gilead's GS-7977.

MH: Sunesis has a data monitoring board (DMB) decision coming up for its large phase 3 trial, and those can be very large movers because the decision comes before a trial is completed. An event, positive or negative, is somewhat unexpected. My assumption is that the DMB will look at the data and say to continue the trial, which should be completed at the end of 2012, with data coming in 2013. I don't have an opinion on whether results are going to be positive or not. I do know that hematological cancers, such as AML, typically show better markers early on for drug efficacy versus solid tumors.

MH: We're negative on this product. We started off negative based on a related drug from Cytokinetics Inc. (CYTK:NASDAQ) with the same mechanism of action, which failed to show responses in solid tumors back in 2007. While multiple myeloma is very different than solid tumors, we feel the failure decreases the likelihood of a successful drug. I also feel that multiple myeloma is a saturated market with some good drugs already out there—Revlimid (lenalidomide), Thalomid (thalidomide) and Velcade (bortezomib). The potential market has shrunk. I don't feel there is a whole lot more advancement to be made in that area.

TLSR: Many thanks to you, Michael. I enjoyed it.

MH: I enjoyed talking to you.

Michael Hay has been with Sagient for more than seven years and has more than 11 years of experience in financial markets. He manages the BioMedTracker analyst team and serves as vice president at Sagient. He is also responsible for product development, corporate planning and sales and marketing. Hay has consulted for numerous top-tier pharmaceutical companies on strategic decisions, as well as worked closely with top healthcare investment firms providing insight on investment and trading decisions. Hay's career in financial markets began at Thomson Financial in 2000. He reached the position of manager, capital markets intelligence, and was directly responsible for corporate client relationships within the technology sector. At Thomson he consulted for senior management regarding shareholder composition, financial markets and competitive positioning. Hay received a bachelor's degree in finance from University of Colorado, Boulder.

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DISCLOSURE: 1) George S. Mack of The Life Sciences Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.3) Michael Hay: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.